Today we are continuing our discussion on the revised proposed regulation that requires defense contractors to maintain adequate business systems or face Government withholds of their billings. Today we want to address audits and audit followup. There were many comments to the initial proposal directed toward DCAA (Defense Contract Audit Agency) and DCMA (Defense Contract Management Agency). These are the agencies tasked with determining whether contractors’ business systems are adequate or inadequate, assessing the adequacy of the corrective action plans, judging when things are sufficiently “fixed” to release withhold amounts, and administering the withhold process. Reviews of the six business systems covered by this proposed regulation are jointly conducted by DCAA and DCMA although DCAA takes the lead in most of them. We will examine four of the concerns expressed by respondents to the initial proposal and DoD’s response to those concerns.
Coming from the current environment where DCAA is not getting anything accomplished, a number of respondents expressed concern that DCAA lacks the resources to perform required audits timely and adequately. DoD’s response provides little comfort in alleviating these concerns. DoD stated that “DCAA has committed to making follow-up business system audits a priority. However, DCAA recognizes that resources are limited, and has taken steps to address staffing challenges.” Perhaps since DCAA has effectively abandoned its “pricing” function (see our post on changes to pricing thresholds), it will have more resources dedicated to performing audits of contractor business systems and for performing followup reviews when needed.
One theme that was addressed in several ways were concerns that audit reports were not written with enough information to help the contracting officer make effective decisions nor do the audit reports include an analysis of the materiality of the deficiency. Recently DCAA instituted a pass-fail system and respondents asserted that the internal control deficiencies cited as a basis for failing a system audit sometimes had no relevance to Government contracting or imposed no risk on overcharging. DoD addressed this issue by stating “DCAA policy is to report only deficiencies determined to be significant deficiencies or material weaknesses in accordance with generally accepted Government auditing standards.” To bolster that policy, DoD revised the proposed rule language to state that ``the report shall describe the deficiencies in sufficient detail to allow the contracting officer to understand the deficiencies and potential adverse impact to the Government.''
A number of respondents believe that the recent Commission on Wartime Contracting (CWC) hearings demonstrated that greater cooperation must be achieved between DCMA and DCAA to oversee Government contractors properly, and that this issue should be addressed before imposing more regulations on contractors, especially as severe and broad as those proposed. DoD responded by stating that it is currently taking measures to improve coordination between DCMA and DCAA. One of those measures is this proposed regulation itself - intended to further improve the effectiveness of DCMA and DCAA oversight of business systems as recommended by the Commission on Wartime Contracting.
Somewhat related to item 1 above, two respondents suggested that DCMA and DCAA are under-resourced to execute the requirements of the rule, and that ACOs do not have the training to determine if a deficiency makes a system inadequate. DoD contends that “resource” issues are unrelated to effective oversight responsibilities. This proposed rule does not add additional oversight responsibilities onto DCAA or DCMA; it merely provides provisions to help protect the Government from the risks of loss due to a contractor’s failure to maintain business systems, as require by the terms and conditions of their contracts. DoD added that it is confident that contracting personnel will make appropriate determinations in accordance with this rule.
We will continue our coverage of the contractor business system proposal tomorrow.